US set to kick the can further down the road

During the first few months of 2010 and 2011, America showed encouraging signs of robust economic growth. In both years, though, by the spring or early summer, hopes of the world’s biggest economy mounting a meaningful and sustainable recovery were snuffed-out.

As a result, the US managed only a paltry 1.7pc real terms GDP expansion in 2011. In recent months, once again, there have been strong indications this could be the year we finally see a proper lift-off in the States. America has put in yet another strong first quarter, with the economy, if anything, performing even better than during the first three months of 2010 and 2011.

An improving US economic outlook has been a big reason why shares have lately been soaring. The S&P500 index posted a 14pc rise during the year to the end of March – its best first quarter since 1998. Over the same period, the tech-heavy Nasdaq put on 19pc, its strongest three-month surge since 1991. “Better US data”, in fact, has helped boost investor sentiment across the globe, shifting it back to “risk on” from “risk off”, with the MSCI EM index of emerging markets also chalking-up a 14pc first quarter gain.

Optimism has grew in part due to US employment trends. Since September, the closely-watched “non-farm payroll” series – a broad measure of how many extra workers are being hired – has shown the best six months of employment gains since the middle of the last decade. America’s hiring boom, in fact, had recently accelerated. US employment rose by an average of 246,000 per month in December, January and February. Little wonder, then, that economists had expected a similar-sized increase in March too, with the consensus estimate at 205,000.

That’s why, data showing only a 120,000 rise in US employment in March, released on Friday, has sparked a wave of investor angst. This is the lowest payroll gain since the autumn and just half the previous month’s total. Are we to see a repeat of the “false start” pattern of 2010 and 2011? Surely, this number raises significant questions, again, about the strength of this US recovery.

Some caution against reading too much into one month’s figure that seems far removed from a previous trend. While disappointing, a payroll rise of 120,000 compares favorably with the 5-year monthly average and, in less skittish times, would be seen as pretty respectable.

Other data hasn’t yet followed the March non-farm payroll. The Purchasing Manager’s Index for manufacturing accelerated slightly last month. Even the break-down of the payroll data showed US manufacturing continuing its strong run in March, adding 37,000 jobs.

Maybe the January and February employment numbers in sectors such as construction were boosted by the unusually warm US winter, making last month’s figure look worse. The data is anyway prone to huge sampling errors and revisions. It’s also worth noting that another survey released last week by ADP, the US payroll processor, suggested America’s private sector added 209,000 jobs in March.

Having said all that, there are good reasons not to be complacent about the US economy. Hiring decisions, in today’s extremely uncertain environment, are complex. Having slashed costs and jobs to the bone during the immediate “post-Lehman” years, firms have in recent months been forced to add staff quickly, to meet the pick-up in business.

When it comes to hiring to build extra capacity, though, hiring to meet future demand, employers remain extremely cautious. As such, on-going concerns about the global economy, with America at its heart, help explain the emerging “stop-start-stop” pattern on US labour markets.

Much of the slowdown in the pace of hiring during March was in the service sector, which increased payrolls by 90,000, down from 204,000 the month before. It’s particularly worrying that retailers shaved 34,000 jobs, adding to a similar loss in February. Sky-high oil prices mean that $4-a-gallon petrol is starting to hit US consumers hard. At the same time, housing market data suggests real estate prices have yet to touched bottom even though the respected Case-Shiller index now puts them 34pc down on the peaks seen in 2006 – another anchor weighing on consumer sentiment. Temporary hiring also went into sharp reverse last month, having risen 55,000 in February, but shedding 8,000 jobs in March.

The optimists point to US unemployment numbers, also released on Friday, which showed the jobless rate falling from 8.3pc to 8.2pc, a three-year low. But, again, a closer look at the data shows that this was because government statisticians, for some reason, decided to shrink the notoriously volatile measure of America’s total labour force by 164,000 people.

Overall, amidst much uncertainty, this March payroll number is a reminder that the US recovery is highly unlikely to happen in a straight line, and remains vulnerable – particularly at a time of on-going systemic dangers in Europe and stubbornly expensive crude. Keep in mind, also, that the Bush tax breaks expire at the end of 2011 and planned spending cuts then come into play. The US economy, still getting on for three-times the size of China, could expand by 3pc this year. But there is also a danger of a much more gloomy 1-2pc growth rate.

Some say this jobs scare has dealt a blow to President Obama’s campaign for a second term – given the extent to which he’s lately been relying on improving economic numbers. “It’s increasingly clear the Obama economy is not working,” claimed Mitt Romney on Friday, fresh from adding three more primaries to his winning streak and now almost certain to win the Republican nomination. “After three years in office, the President’s excuses have run out”.

Which brings us to the heart of the matter. For while these March payroll numbers are being closely scrutinized, as they will be every month, the reality is that US economic sentiment in the run-up to the November election is almost entirely dependent on monetary policy – namely whether or not the government prevails on the Federal Reserve to launch yet more QE.

With the economy improving and energy costs pushing up inflation, the Fed has recently displayed a reluctance to implement more “unorthodox measures” after “Operation Twist” ends in June. Certainly, the rather hawkish minutes from the Federal Open Market Committee’s March meeting, released last Tuesday, led many to conclude there would be no more pre-election “funny money”.

But then, on cue, the Bureau of Labor Statistics serves up an “alarming” number for March employment trends – a number, lest we forget, which is preliminary, subject to big revisions and entirely contradicted by private sector surveys of the same thing. Suddenly, as if by magic, an extension of QE beyond June is back on the agenda – which would likely keep share prices and broader economic sentiment dosed-up on monetary happy pills as the election battle ensues.

Too cynical perhaps? I think not. We’re now in the crazy situation where, as far as asset markets are concerned, bad news is good news. Why? Because worrying payroll gain numbers mean Ben Bernanke has a better excuse to crank-up his virtual printing press once more – money that’s meant to boost bank lending, of course, so helping the broader economy, but which the banks prefer just to park in speculative “momentum bets”.

That’s why the 10-year Treasury yield fell on the release of the March payroll gain and the dollar eased, because it’s now clear we’ll see yet more American QE.


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